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February 9, 2015

Lufthansa warns staff that further savings will be required

It is no secret that Lufthansa has some of the highest running costs in the airline business and, consequently, has become vulnerable to low-cost competitors such as Ryanair and easyject. Average yields fell by more than 3% in 2014 and any cost cuts performed recently within the group have been far from sufficient to compensate for this staff were told in a letter Lufthansa board members Karl Ulrich Garnadt and Bettina Volkens sent out on February 5th. In addition it stated “The competition knows our cost position and knows that this is an area where we are vulnerable… Our cost level is now 30 to 40% higher than that of our direct competitors such as easyJet or Turkish Airlines.”
2014 was a year which saw its pilots strike ten times over wages and early-retirement pension rights, the biggest threat coming from the company’s intended expansion of Eurowings. Under chief executive Carsten Spohr, Lufthansa wants to expand Eurowings, the company’s regional airline, into a low-cost carrier and has been negotiating with airline staff to try and reduce costs on some routes that are popular with tourists and as a consequence are more price sensitive.
Despite remedial measures taken to reduce costs, Lufthansa remains in a perilous situation as it looks like staffing costs are going to increase, plus other costs beyond the company’s control are rising, including airport fees and air traffic control charges. Though a rise in fuel costs would affect every airline, such an occurrence would place the airline on very thin ice.
It is not even as if Lufthansa is a just sitting duck either. Recently they have seen Etihad and Darwin Airline SA (which they have rebranded as Etihad Regional and in which they plan to buy a 33.3% stake), scale back in the Swiss travel market. “Swiss and Lufthansa have engaged in a series of abusive actions aimed at forcing us out of the Swiss market,” Darwin Chief Executive Officer Maurizio Merlo said in the statement, ranging from termination of a wet lease contract and insurance policies to “dumping fares” on its routes,” according to Bloomberg business. In November last year Swiss terminated a wet lease cooperation with Darwin, in turn changing to Lufthansa’s Austrian subsidiary as a means of increasing its capacity on its Zurich-Lugano flights by 50%. Having now established a base in Geneva, the airline will fly Geneva-Lugano 16 times a week.
In September Emirates upgraded one of its thrice-daily Frankfurt-Dubai flights to an Airbus Group NV A380s. However to give you a true sense of what Lufthansa is facing, in January Qatar put the most modern airliner available, an A350, on its Frankfurt-Doha route. The reason given by Akbar Al Baker, Chief Executive of Qatar: “We chose Frankfurt because sometimes I like to show off my product to airlines that object our entering into their markets.”